What is the real reason for the continued rise in housing prices?

What is the real reason for the continued rise in housing prices?

In the past two decades, China’s real estate industry does not have a cycle in the typical sense, but has always been fluctuating and rising. Since the beginning of this year, housing prices in my country’s first-tier cities have shown an accelerated upward trend. Among the 70 large and medium-sized cities nationwide in May, 62 cities saw a month-on-month increase. Among them, the growth rate of first-tier cities was even higher, with a year-on-year growth rate of 6.0%, an increase of 2.1 percentage points from the end of the previous year, the highest since the third quarter of 2017.

my country’s high housing prices are due to land supply, as well as land systems and policies. After 2015, the ratio of land costs to housing prices in big cities has reached an average of 40%. For a long time, my country’s real estate market has focused on demand regulation, and the effect of regulation is not sustainable. For a time, the expectation of unilateral rise in housing prices has been formed.

At present, the demand-side control measures in big cities have almost been used to the extreme. Real estate regulation and control need to adopt a systematic approach in combination with the characteristics and laws of my country’s economic development. The so-called “persistence in not using real estate as a short-term economic stimulus” should be positioned from the perspective of the coordinated development of real estate and the economy.

Our newly published book “Real Estate and China’s Economy” this year demonstrates the close and complex relationship between real estate and China’s economy, and makes recommendations on my country’s housing issues from the overall perspective.

1. The structural characteristics of my country’s real estate market

A large amount of urban land in my country is supplied by commerce and industry, which is closely related to the GDP assessment of local governments-commercial land and industrial land will bring continuous tax revenue and GDP growth.

China’s residential land supply accounts for the lowest proportion of total land supply among major countries. In 2016, the residential land in my country’s first-tier cities accounted for an average of about 27% of the urban construction land area, while in New York it exceeded 40%.

When the “destocking” strategy was proposed, the destocking cycle of commercial housing in China was about 4.4 months (calculated based on the average annual sales of commercial housing from 2013 to 2017 of 1.231 billion square meters) , which is currently about 1.7 months.

At present, there is almost no inventory of residential houses in first-tier cities, and new houses need to be lined up. The inventory of commercial and office buildings is high. Shanghai’s commercial and office housing sales cycle is as high as about 110 months; Beijing and Shenzhen are relatively low, but there are also 30 and 50 months.

The unreasonable land supply structure in my country’s first-tier cities has caused tremendous pressure on commercial housing sales. Therefore, the urban land structure needs to be improved.

The differentiation between cities is also obvious. Due to industrial development, population migration, and better conditions for medical care, education, and elderly care, first- and second-tier cities, especially first-tier core cities, have seen relatively high housing prices in recent years. Quoting the survey data of the “2017 China Urban Housing Vacancy Analysis” published on December 21, 2018 by the China Family Finance Investigation and Research Center, the national housing vacancy rate was 21.4% in 2017, an increase of 3 percentage points from 2011 .

From the perspective of different levels of cities, the housing vacancy rate in first-tier cities has shown a downward trend. In 2017, it was 16.8%, a decrease of 1.1 percentage points from 2011; second-tier cities and third- and fourth-tier cities both showed an upward trend. The vacancy rates of the two cities in 2017 They were 22.2% and 21.8%, respectively, an increase of 4.4% and 2.8% respectively from 2011 (see the figure below) .

What is the real reason for the continued rise in housing prices?

In addition, the differentiation of housing prices in the same city in China has intensified. Take Shanghai as an example. In 2020, Huangpu District will rank first in each district with an average price of 150,000 yuan per square meter, while the average price in areas outside the outer ring such as Qingpu District will be around 30,000 to 60,000 yuan. Before the sharp increase in housing prices in 2015, two The regional average price is around 50,000 and 20,000 respectively. The housing demand side structure has also changed. Due to the release of the second child and the pursuit of high-quality living conditions, there is a strong demand for improvement in the commercial housing market, and the products in the area of ​​100-140 square meters are concentrated and sold well. 

2. The fundamental reason for rising housing prices lies in the imbalance between supply and demand

There is a view that the rise in housing prices is due to excessive currency issuance. In fact, currency issuance is a necessary condition for rising housing prices, not a sufficient condition . The quantity of money affects the price of all commodities. Once the currency is issued, the flow is uncertain.

The actual situation is that the current price index CPI is not high. The high price of a specific commodity is mainly caused by the supply and demand relationship of the commodity, as is the price of real estate. Currently, housing prices in some cities are still falling. Obviously, this is not caused by currency issuance.

Therefore, the tightening of the currency cannot be used to curb the rise in housing prices. Shrinking the money supply will hurt small and medium-sized enterprises. Relevant regulatory authorities are now issuing a series of policies to strictly prevent the illegal flow of funds into real estate. This is a relatively effective macro-prudential management policy.

The imbalance between supply and demand is the main reason for the continued rise in housing prices. Shanghai has a permanent population of 25 million and a land area of ​​6,340 square kilometers, including the 1,000 square kilometers of Chongming Island that cannot be developed as required; Beijing has more than 16,000 square kilometers, and the plain part is almost the same as the whole of Shanghai, but the permanent population is 300 less than that of Shanghai. More than ten thousand. Therefore, generally speaking, the high housing price is not due to a small land area, but a relatively low proportion of residential land supply. Including Hong Kong, China, there are also many undeveloped land.

Due to the increase in residents’ income and the demolition of old cities, the demand for housing in my country has been increasing, while the supply is relatively small. Overweight real estate is a major feature of Chinese families. There are two reasons for this: one is our lack of investment channels; the other is related to China’s traditional culture. They all hope to have a fixed home. Many families still own two or more houses. This is a matter of concept.

In response to the long-term structural problems of the real estate industry, my country has also introduced a number of measures to regulate and control. But for a long time, my country’s real estate market has focused on demand regulation, and the long-term effect has not been obvious.

As early as November 2016, I published an article “An effective method for house price regulation is to pay equal attention to supply and demand” in “China Finance  . The effect of demand regulation is mainly in the short-term, while supply regulation is more focused on the medium and long-term, and supply regulation helps stabilize public expectations. The public’s expectations of housing prices are an important factor in determining housing prices. Therefore, I have been calling for the stabilization of housing price expectations.

This year’s “Government Work Report”’s regulation of real estate supply is the most prominent among previous government work reports: “Solve the outstanding problems of housing in big cities, increase land supply, arrange special funds, and concentrate construction to increase affordable rental housing The supply of shared property housing, standardize the development of the long-term rental housing market, reduce the burden of rental housing taxes and fees, and do our utmost to help new citizens and young people alleviate housing difficulties.”

We should continue to adhere to the transition from real estate regulation policies to a combination of supply and demand regulation: on the one hand, we must adopt various means to strictly regulate and control the demand side; on the other hand, increase the supply of land on the supply side.

3. Based on the differentiation between cities, optimize the land supply system and structure

In the past ten years or so, the method of supplying land was auction, and the higher the price was. Therefore, the price of land became higher and higher. On February 26, the relevant person in charge of the Ministry of Natural Resources stated that key cities should collectively announce and supply land for residential use, and that the land supply will not exceed three times throughout the year. The main purpose of this policy is to stabilize housing prices by stabilizing land prices.

Shanghai recently issued the announcement of the first batch of 52 residential plots for the centralized transfer. The new bidding rules are mainly:

Under the linkage mechanism of house price and land price, the starting price, stop price and highest quotation of the land shall be set reasonably. When the quotation is lower than the stop price, the higher price will be awarded; if it is higher than the stop price, enter the one-time written quotation link, a written quotation shall not exceed the highest quotation, and the bidder shall be determined based on the principle of being closest to the average price of a written quotation. The highest quotation for this batch of commercial residential land is generally limited to 110% of the starting price.

This is a restriction on land prices. This measure may be effective, and I proposed a similar method many years ago.

The future land transfer should be linked to the city’s population, industry, and business indicators, and dynamic adjustments and monitoring should be made. In cities with influx of people, the supply of land, especially residential land, should be increased; in cities with outflow, the supply of residential land should be reduced. Moreover, the residential land index can be adjusted nationwide.

Each region has set up its own land “red lines”, which limits the government’s space for land regulation to a certain extent. Local governments also lack the ability to coordinate land resources across regions. Therefore, higher-level departments are required to coordinate across the country.

4. Solve the problem of high housing prices by “squeezing the bubble” instead of “puncturing the bubble”

Regarding the relationship between real estate and the economy, it must be divided into two:

On the one hand, the real estate industry still plays an important role in economic growth. At the beginning of last year, due to the impact of the epidemic, real estate investment and sales were affected, but then real estate investment and sales improved month by month. Compared with investment in infrastructure and manufacturing, real estate investment has strong resilience and still plays a role in stabilizing the economy.

On the other hand, high housing prices will bring many negative effects. First, weaken the potential for economic development. Because all economic activities require land supporting facilities, rising land prices will increase costs. Moreover, high housing prices will increase all development costs including human resource costs; second, if resources are concentrated in the real estate industry, it may cause the hollowing out of the industry; third, high housing prices will cause the gap between the rich and the poor to widen and become a social problem.

From the perspective of the coordinated development of housing prices and the real economy, a 1% increase in housing prices will lead to a 0.07% increase in wages, a 0.01% decrease in profits of industrial enterprises, and a 0.05% decrease in household consumption. The continuous rise of land prices will lead to the continuous rise of housing prices, the profit margins of real enterprises are getting smaller and smaller, and the consumption of residents is also squeezed. Therefore, the real economy will be in trouble. This is the reason why land finance is unsustainable.

Real estate has become the main form of wealth for Chinese residents. In this sense, it is not advisable to suppress housing prices through the “turning point” method. Because the resulting decline in house prices will reduce residents’ actual savings, weaken domestic demand, and increase financial risks.

The correct method should be to control housing prices while continuously increasing the income level of residents through economic development, so that the growth of residents’ income will exceed the increase in housing prices for a long time, and the ratio of housing prices to income will be constantly reduced, through “squeezing the bubble” instead of “puncturing the bubble.” “The method fundamentally solves the problem of high housing prices in China and avoids the plummet adjustments in housing prices that have occurred in the United States and Japan.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-is-the-real-reason-for-the-continued-rise-in-housing-prices/
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